Long‐term Effects of Fiscal Stimulus and Austerity in Europe
| Author | Sebastian Gechert,Gustav Horn,Christoph Paetz |
| DOI | http://doi.org/10.1111/obes.12287 |
| Published date | 01 June 2019 |
| Date | 01 June 2019 |
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©2018 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 81, 3 (2019) 0305–9049
doi: 10.1111/obes.12287
Long-term Effects of Fiscal Stimulus andAusterity in
Europe*
Sebastian Gechert,†Gustav Horn† and Christoph Paetz†
†Macroeconomic Policy Institute (IMK), Duesseldorf, 40476, Germany
(e-mail: sebastian-gechert@boeckler.de, gustav-horn@boeckler.de,
christoph-paetz@boeckler.de)
Abstract
We analyze whether there are negative (positive) long-term effects of austerity measures
(stimulus measures) on potential output growth. Based on the approach of Blanchard and
Leigh (2013) and Fat´as and Summers (2018) and using a novel data set of narratively
identified fiscal policy shocks, we estimate the impact of these shocks on potential output.
We robustly find a considerable underestimation of multiplier effects and their persistence
for most European countries in the early years after the financial crisis and subsequent
Euro Area crisis. We conclude that fiscal consolidation was badly timed and thus not only
deepened the crisis but may have caused evitable hysteresis effects.
I. Introduction
Output in many European countries has long remained below precrisis potential. The
recession took considerably longer and was much deeper compared to past downturns and
the recovery was comparably weak. Forecasts by the European Commission (EC) or the
International Monetary Fund (IMF) in the aftermath of the crisis assumed a quick recovery
to previous trends, but had to be revised downwards several times. These revisions most
strikingly concerned not only GDP but also potential GDP forecasts. Figures 1 and 2 show
repeated over-optimism of GDP and potential output forecasts for the EU as a whole and
Greece as an extreme example.1
The persistent and systematic forecast errors call into question the structure and assump-
tions of the forecasting models employed. Clearly, the financial crisis and the subsequent
crisis of the Euro Area were extreme events, whose dynamics and channels of impact
might be quite different from more tranquil times. A number of influential factors that
unexpectedly drovethe severity of the crisis have been discussed, among them the fragility
JEL Classification numbers: E62, H68.
*We thank Achim Truger,Antonio Fatas, Karel Havik, Katja Heinisch, Oana Furtuna, Rudolf Zwiener, Wouter
van der Wielen and two anonymous referees for helpful discussions and data access. All remaining errors are our
own.
1Apart from Germany in all other major European countries potential output growth rates decreased considerably
and are now below precrisis figures. Potentialoutput estimates were revised downwards both for forecasted and past
values in most European countries, apart from Spain.
648 Bulletin
EU-27 Greece
-5
-4
-3
-2
-1
0
1
2
3
4
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2008 Autumn 2009 Autumn
2010 Autumn 2011 Autumn
2012 Autumn 2013 Autumn
2014 Autumn 2015 Autumn
-10
-8
-6
-4
-2
0
2
4
6
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2008 Autumn 2009 Autumn
2010 Autumn 2011 Autumn
2012 Autumn 2013 Autumn
2014 Autumn 2015 Autumn
Figure 1 Vintages of GDP growth rate forecasts for the EU-27 and Greece, in %, 2007–16
Source: Ameco, Firstrun database ‘A dataset of fiscal variables’, own illustration.
EU-27 Greece
0
1
1
2
2
3
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2008 Autumn 2009 Autumn
2010 Autumn 2011 Autumn
2012 Autumn 2013 Autumn
2014 Autumn 2015 Autumn
-5
-4
-3
-2
-1
0
1
2
3
4
5
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2008 Autumn 2009 Autumn
2010 Autumn 2011 Autumn
2012 Autumn 2013 Autumn
2014 Autumn 2015 Autumn
Figure 2 Vintages of potential GDP growth rate forecasts for the EU-27 and Greece, in %, 2007–16
Source: Ameco, Firstrun database ‘A dataset of fiscal variables’, own illustration.
of the financial system, private sector deleveraging,increased uncertainty of private agents,
current account imbalances, monetary policy constraints, sustainability of public finances
or the impact of discretionary fiscal policy.
In the present paper, wefocus on fiscal policy, while we take into account the others.We
ask whether the post-2009-shift towardsfiscal consolidation had an unexpected substantial
negative and persistent impact on GDP and potential output, in particular in the EU and
©2018 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd
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